Bloomberg News

Norway Misses Haven Fest as Record Issuance Looms: Nordic Credit

By Josiane Kremer
November 19, 2012

Norway is the world’s safest issuer of bonds, credit default swaps indicate, as oil wealth generated from its offshore deposits over the past 40 years has allowed the economy to withstand the worst of Europe’s debt crisis. Photographer: Chris Ratcliffe/Bloomberg

Norway faces higher borrowing costs
next year as the AAA rated nation plans record bond issuance
amid a potential drop off in demand from foreign buyers.

The Finance Ministry in Oslo last week presented plans to
issue as much as 100 billion kroner ($17 billion) in long-term
domestic loans next year, a record for the oil-rich nation and
up from 70 billion kroner this year. Norway is seeking to
finance increased lending to its exporters, the state’s housing
bank and other government lending plans.

The supply increase will further test a market that has
been underperforming its peers amid investor optimism European
leaders will be successful in containing the euro crisis and
keeping the common currency intact. Norway, Europe’s second-
largest oil exporter, had emerged as a haven from the crisis
because of its fiscal strength. The nation, like Switzerland,
isn’t a member of the European Union.

“Issuance next year will be even heavier and we’re not
seeing international investors stepping up to the plate,” Gaute Langeland, a senior fixed-income analyst at Nordea Markets in
Oslo, said in an interview on Nov. 15. “You will need some
domestic funds interested and we think that requires a
significant change in pricing.”

Scant Returns

Norwegian bonds have lost 0.24 percent since the end of
July, the third-worst performances among 26 major sovereign debt
markets tracked by Bloomberg/EFFAS indexes. Only U.K. and Danish
debt posted steeper losses. Yields on three-year bonds rose to
1.42 percent today from a January low of 0.96 percent. The bonds
have gone from yielding as much as 170 basis points below swap
rates to about 73 basis points. Spreads have averaged 116 basis
points this year.

Norwegian broad market returns lagged behind a 9.6 percent
gain in Italian bonds and 7.6 percent increase in Spanish debt
after European Central Bank Governor Mario Draghi in July
pledged to do “whatever it takes” to save the euro. At the
same, Norway’s central bank has signaled it may raise benchmark
interest rates as soon as March, to cool an economy that Norges
Bank Deputy Governor Jan F. Qvigstad says has been
“overheating.”

Still, the government is sanguine that its unblemished
credit history and still relatively limited supply of bonds will
continue to attract investors.

Floating Money

“We aren’t very concerned about the demand,” Sigurd Klakeg, deputy director general at the Norwegian Finance
Ministry, said in a Nov. 15 interview. “After all there’s a lot
of money floating around and there is still demand for quality
issues both in Norway and other countries. We’re a safe haven
for people out there.”

Norway has used its oil wealth to build up a $660 billion
sovereign-wealth fund and the nation has no net debt. The
government uses up to 4 percent of the fund to cover budget
deficits.

Norway is targeting a maximum outstanding amount in
treasury bills next year of 250 billion kroner. The Finance
Ministry and the central bank, which issues debt on behalf the
government, will publish a 2013 auction calendar in December.

“Even if the foreign share of investments in Norwegian has
fallen slightly this year, international investors are still
active,” said Hans Christian Tronstad, chief specialist at
Finance Ministry’s Debt Management Office. “Our impression is
that these investors welcome improved liquidity in the bonds
following larger government borrowing.”

Safest Bonds

Norway is the world’s safest issuer of bonds, credit
default swaps indicate, as oil wealth generated from its
offshore deposits over the past 40 years has allowed the economy
to withstand the worst of Europe’s debt crisis. The country’s
five-year CDS traded at about 19 basis points, while Germany’s
stood at 31 basis points. Credit default swaps allow traders to
bet on the probability of a debt default.

Norway has about $74.5 billion in outstanding bonds and
bills, the third-lowest amount of the 24 developed nations
tracked by Bloomberg.

Traders are welcoming more debt, saying it will help
improve liquidity, or ease of trading, which could improve
pricing as whole and damp risks of sudden price swings.

Spreads Widen

The yield difference between Norway’s benchmark note due
2021 and German bonds with a similar maturity has widened to 63
basis points today from seven basis points in January. Swedish
10-year bonds trade at a spread of nine basis points more than
German debt while Danish bonds trade 27 basis points below the
rates of Europe’s largest economy.

“Some of the explanation for this isn’t a matter of
supply, but it’s basically a matter of liquidity. So it’s some
sort of liquidity premium,” Michael Kofoed, a bond trader at
SEB AB (SEBA) in Oslo said by phone. “So if we have better liquidity
we will see spreads go tighter in the longer run.”

Langeland at Nordea also said the market may benefit from
improved liquidity.

That may still depend on what the central bank decides to
do. Policy makers have signaled their next move will be to raise
the main rate from 1.5 percent to counter the effects of
overheating. The central bank has left their main rate unchanged
since March after cutting it twice since December.

Last month Governor Oeystein Olsen postponed the bank’s
next rate rise into 2013, citing low inflation even as record
offshore investments helped push registered unemployment to
lowest in almost four years.

“I think there will be some widening of the spreads
because it is a new situation,” said Jens Peter Soerensen,
chief bond analyst at Danske Bank A/S (DANSKE) in Copenhagen. “It always
takes a little bit of time to adjust to that and there are
bigger amounts that you need to trade.”

To contact the reporter on this story:
Josiane Kremer in Oslo at
jkremer4@bloomberg.net

To contact the editor responsible for this story:
Jonas Bergman at
jbergman@bloomberg.net